Employer-provided healthcare programme may not be adequate to cover your family.
Insurance is an important part of our lives, as it helps indemnify losses to protect our standard of living. The question is: How should you insure? The question assumes relevance because of three factors — low awareness for medical insurance, dominating presence of with-profit life insurance products and high volatility in the stock market. It is in this context that we discuss issues related to medical, life and investment-portfolio insurance.
NON-INVESTMENT INSURANCE
You should consider buying a medical insurance even if your employer offers a healthcare programme. For one, you could change jobs. And your new employer may not offer similar benefits. Also, your existing employer may choose to reduce coverage as a cost-cutting measure. Besides, employer-provided healthcare programme may not be adequate to cover your family. The issue is that medical insurance increases with age. So, it is better that you enrol for a medical insurance programme when you are 28 than when you are 40.
You should have a medical insurance for yourself and your dependants for as long as the insurance company offers coverage. You should also consider top-up plans with high deductibles. Such plans are cheaper and useful when you incur large expenses during medical emergencies.
Then, you and your spouse should have life insurance protection. The amount of insurance should be such that claims, if made, cover your family’s existing liabilities and loss of income due to death of the insured. You should buy term insurance contracts, even if it means not recovering your life insurance premiums if you survive the term. Remember, insurance is to indemnify losses, not to generate gains.
Do not buy with-profit insurance plans, as they are expensive and offer low returns. You can instead buy term insurance and invest the premium-difference in mutual funds to earn higher returns. And what about investment-portfolio insurance?
Suppose you want to accumulate Rs 10 crore for your retirement. A sharp decline in the value of your portfolio during your working life could mean that you may fall short of your required wealth at the time of your retirement. And that could affect your standard of living in your retired years. This risk is higher when your portfolio value declines during the last 10 years of your working life — a period that is called as the retirement risk zone. You face a similar risk when you create a portfolio to meet any objective such as funding your child’s college education. The question is: Can you insure your portfolio from losses and increase your chances of achieving your investment objectives?
Unfortunately, you cannot buy portfolio insurance because such products are typically available for institutional investors. And you cannot use exchange-traded options to effectively protect your portfolio because such options are shorter-maturity products, while your investment horizon is longer.
REBALANCING PROCESS
You do, however, have a built-in insurance in your portfolio — your rebalancing process. This is the process where you periodically reduce your equity investments as you approach your investment horizon date. That is, you lock-in to the unrealised gains on equity and lower your future losses by buying more bonds that mature at the end of your investment horizon. Rebalancing does not, however, protect your portfolio from unexpected market crashes. But neither will exchange-traded options.
Insurance is important to protect your standard of living, but it comes at a high cost. So, you should buy medical and life insurance that is required and at an optimal price. That means you need to shop for your insurance protection. Lower premiums are not necessarily better, especially if the company that charges higher premium has a better track record of hassle-free settlement. After all, you buy insurance because you want the insurance company to indemnify your family’s losses.
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